DEAR FELLOW SHAREHOLDERS,

Transcription

1 2013 ANNUAL REPORT

2 DEAR FELLOW SHAREHOLDERS, Another year of record financial performance, growth and momentum in some of our oldest markets, and more new Members coming to Herbalife than ever before clearly demonstrate that public confidence in our company and business model has never been greater. Our Members continue to build sustainable businesses focused on developing long-term customers, as our products and business opportunity positively address three challenging global trends: rising levels of obesity, an aging population and increasing numbers of people who are underemployed. In 2013, all six of our regions experienced increases in Volume Points, net sales, and average active Sales Leaders over the prior year. We saw a record number of Sales Leaders retained in 2013; regionalization and city-by-city initiatives continue to create a firm foundation for united leadership, systemized training, and the sharing of daily consumption best business practices among Members; and penetration for the company world-wide is up to 1.0 Volume Points per capita (+12%) for the first time in the company s history. All of this resulted in record net sales of $4.8 billion, representing growth of 18 percent, on a Volume Point growth of 13 percent, and a 36 percent increase in adjusted EPS. The company generated cash flow from operations of $773 million, an increase of 36 percent compared to the prior year; invested approximately $147 million in capital expenditures; and paid dividends of $123.1 million. At Herbalife, creating shareholder value is primary. It s a key objective for our management team and our Board of Directors, and as such, we are always evaluating the proper capital structure to best maximize shareholder value above and beyond the favorable contribution from our strong financial performance. In 2013 the company purchased 6.1 million common shares and at the start of 2014 we completed a $1.15 billion financial transaction that will be very accretive to the company. The fact that we achieved another record performance of double-digit growth, while under attack from an expensive publicity campaign filled with false and misleading information about our company, is further testament to the integrity of our business model, the value of our products and the focus and unwavering commitment of everyone at Herbalife. We continue to look forward and to Build it Better every day, with the introduction of what we believe are industry-leading Member and consumer protections. The Herbalife Gold Standard provides a low risk, easy entry and exit into and out of the business low start up costs, comprehensive buy back policies and clear and timely disclosures on potential income - all encouraging the entrepreneurial spirit for everyone. We have increased the emphasis on training and education to support our Members businesses in many different areas, including the introduction of a mandatory training course for all new Sales Leaders to help them fully understand the business. Our science-based nutrition products have never been more relevant and we are focused on our global strength in core nutrition as we look at new ingredients, formulas and delivery forms to address the demands of our Members and their customers. At the same time we are creating innovative new products, such as our exciting Herbalife SKIN product line, which was recently launched in the U.S. We continue to make investments in manufacturing, technology and distribution to enable us to stay ahead of the growth and put our products and tools closer to our Members. Our new manufacturing facility in Winston-Salem, N.C., remains on track to start operations in Q2 2014; we continue to pilot innovative new methods to provide enhanced product access in market; and we have begun to roll out an enhanced online tool to support our Members. We understand that our brand s strength is the experience and the emotional connection that is created through our Herbalife Members and their product success. Herbalife-sponsored athletes, teams and events around the world continue to enhance brand awareness as these authentic users of our products deliver winning performances in their chosen sports. One of our core values is giving back to our communities, and 2013 marked an important milestone as our Herbalife Family Foundation now supports over 100 Casa Herbalife programs around the world. Members, employees and their friends and families donate their time and money to bring good nutrition to more than 120,000 vulnerable children every day. Our company is experiencing tremendous growth across all our key metrics around the world. Our products and business opportunity have never been more relevant. Our members and sales leaders remain highly engaged, sharing great ideas to fuel global momentum. Team Herbalife remains focused on what we know to be right supporting our Members in bringing great nutrition and an opportunity for economic empowerment to their communities. Thank you for your continuing confidence and support, MICHAEL O. JOHNSON Chairman and Chief Executive Officer, Herbalife

3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: HERBALIFE LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box 309GT (Zip Code) Ugland House, South Church Street Grand Cayman, Cayman Islands (Address of Principal Executive Offices) (213) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Shares, par value $0.001 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Í Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Í Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Í No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Í No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( 229,405 of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Í Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Í There were 101,245,008 common shares outstanding as of February 12, The aggregate market value of the Registrant s common shares held by non-affiliates was approximately $2,171 million as of June 30, 2013, based upon the last reported sales price on the New York Stock Exchange on that date of $ DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant s fiscal year ended December 31, 2013, are incorporated by reference in Part III of this Annual Report on Form 10-K.

5 FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words may, will, estimate, intend, continue, believe, expect or anticipate and any other similar words. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the Securities and Exchange Commission. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include, among others, the following: any collateral impact resulting from the ongoing worldwide financial environment, including the availability of liquidity to us, our customers and our suppliers or the willingness of our customers to purchase products in a difficult economic environment; our relationship with, and our ability to influence the actions of, our Members; improper action by our employees or Members in violation of applicable law; adverse publicity associated with our products or network marketing organization, including our ability to comfort the marketplace and regulators regarding our compliance with applicable laws; changing consumer preferences and demands; our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Member relations and operating results; the competitive nature of our business; regulatory matters governing our products, including potential governmental or regulatory actions concerning the safety or efficacy of our products and network marketing program, including the direct selling market in which we operate; legal challenges to our network marketing program; risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela; uncertainties relating to the application of transfer pricing, duties, value added taxes, and other tax regulations, and changes thereto; uncertainties relating to interpretation and enforcement of legislation in China governing direct selling; uncertainties relating to the interpretation, enforcement or amendment of legislation in India governing direct selling; our inability to obtain the necessary licenses to expand our direct selling business in China; adverse changes in the Chinese economy, Chinese legal system or Chinese governmental policies; 3

6 our dependence on increased penetration of existing markets; contractual limitations on our ability to expand our business; our reliance on our information technology infrastructure and outside manufacturers; the sufficiency of trademarks and other intellectual property rights; product concentration; changes in tax laws, treaties or regulations, or their interpretation; taxation relating to our Members; product liability claims; whether we will purchase any of our shares in the open markets or otherwise; and share price volatility related to, among other things, speculative trading and certain traders shorting our common shares. Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this Annual Report on Form 10-K, including under the heading Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations and in our Consolidated Financial Statements and the related Notes. Forward-looking statements in this Annual Report on Form 10-K speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law. The Company Unless otherwise noted, the terms we, our, us, Company and Herbalife refer to Herbalife Ltd. and its subsidiaries. Herbalife Ltd. is a holding company, with substantially all of its assets consisting of the capital stock of its direct and indirectly-owned subsidiaries. PART I Item 1. BUSINESS GENERAL We are a global nutrition company founded in 1980 that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. Herbalife distributes and sells its products through a network of independent members, or Members, using the direct selling channel. We are in the process of changing our terminology to identify distributors as Members. Those Members who participate in the business opportunity that our network marketing program presents are referred as sales leaders. As of December 31, 2013, we sold our products in 91 countries to and through a network of approximately 3.7 million independent Members. Most of our Members are discount customers, however as of December 31, 2013, 672,000 achieved sales leaders status. In China, in order to comply with local laws and regulations, we sell our products through, sales representatives, sales officers, independent service providers and in retail stores. We believe the enhanced consumer awareness and the demand for our products due to the global obesity epidemic coupled with the effectiveness of our distribution network and actively engaged Members have been the primary reasons for our success throughout our 34-year operating history. 4

7 We categorize our science-based products into four principal groups: weight management, targeted nutrition, energy, sports & fitness and outer nutrition. Weight management, targeted nutrition, energy, sports & fitness and outer nutrition accounted for 63.5%, 23.0%, 5.3% and 3.3% of our net sales in fiscal year 2013, respectively. Our operating segments are based on geographical operations in six regions: North America, Mexico, South & Central America, EMEA (Europe, Middle East and Africa), Asia Pacific and China. We believe that the direct-selling channel is ideally suited to marketing our products because sales of weight management, nutrition and personal care products are strengthened by ongoing personal contact, coaching and education between Members and their customers. This frequent, personal contact can enhance consumers nutritional and health education as well as motivate consumers to begin and maintain wellness and weight management programs. In addition, our Members consume our products themselves, and therefore can provide first-hand testimonials of the effectiveness of our products to their customers, which can serve as a powerful sales tool. People become Herbalife Members for a number of reasons. Most join to receive a discounted price on products for consumption by their families. Our Members, who are independent contractors, also have the opportunity to profit from selling our products and upon achieving certain qualification status can earn Royalty Overrides on sales made by Members whom they sponsor into their sales organizations. PRODUCT OVERVIEW For 34 years, our products have helped Members and their customers from around the world lose weight, improve their health and experience life-changing results. As of December 31, 2013, we marketed and sold over 150 products encompassing over 5,000 SKUs. Our products are often sold as part of a program, and therefore our portfolio is comprised of a series of related products designed to simplify weight management and nutrition for our Members and their customers. The following table summarizes our products by product category. Product Category Description Representative Products Weight Management (63.5%, 62.7%, and 62.5% of net sales for 2013, 2012, and 2011, respectively) Targeted Nutrition (23.0%, 23.2%, and 22.8% of net sales for 2013, 2012, and 2011, respectively) Energy, Sports & Fitness (5.3%, 5.2%, and 4.9% of net sales for 2013, 2012, and 2011, respectively) Outer Nutrition (3.3%, 3.6%, and 4.3% of net sales for 2013, 2012, and 2011, respectively) Meal replacement, protein shakes, drink mixes, weight loss enhancers and healthy snacks Dietary and nutritional supplements containing quality herbs, vitamins, minerals and other natural ingredients Products that support a healthy active lifestyle Facial skin care, body care, and hair care 5 Formula 1 Healthy Meal, Herbal Tea Concentrate, Protein Drink Mix, Personalized Protein Powder, Total Control, Prolessa Duo and Protein Bars Aloe Concentrate, Niteworks, Garden 7 phytonutrient supplement, Best Defense for improved immune system, COQ10 Plus Herbalife24 product line, Liftoff energy drink, H 3 O hydration drink Herbalife SKIN line, Skin Activator anti-aging line, Herbal Aloe Bath and Body Care line, NouriFusion multivitamin skin care line, Radiant C antioxidant skin care line

8 Product Category Description Representative Products Literature, Promotional and Other Products (4.9%, 5.3%, and 5.5% of net sales for 2013, 2012, and 2011, respectively) Start-up kits, sales tools, and educational materials International Business Packs, BizWorks Weight Management Weight Management is our largest product category representing 63.5% of our net sales for Formula 1, our best-selling product line, is a healthy meal with soy protein, fiber, botanicals plus essential vitamins and minerals that is available in various flavors to help support weight management. It has been the centerpiece of our weight management program for 34 years and generated approximately 28% of net sales for the year We continue to be the worldwide leader in meal replacements and in many markets we have also recently introduced meal replacement bars under our Formula 1 product line. Targeted Nutrition We sell numerous dietary and nutritional supplements designed to meet our customers specific nutritional needs. These supplements contain quality botanicals, vitamins, minerals and other natural ingredients and focus on specific life stages of our customers, including women, men, children and those with health concerns, including heart health, healthy aging, digestive health, or immune solutions. Niteworks is a product developed with Nobel Laureate in Medicine, Dr. Louis Ignarro, which supports energy, circulatory and vascular health and enhances blood flow to the heart, brain and other vital organs. Garden 7 which was developed with Dr. David Heber, head of our Nutrition Advisory Board, is designed to provide the phytonutrient benefits of seven servings of fruits and vegetables and has anti-oxidant and health-boosting properties. Best Defense is an effervescent drink that helps boost immunity. Energy, Sports & Fitness We sell numerous products designed to meet the nutritional needs of athletes. The Herbalife24 product line is a complete, seven-product program, formulated to meet the nutritional needs of the 24 Hour Athlete, whether they be a top professional, or amateur fitness enthusiast. The Herbalife24 product line enables athletes to customize their nutrition program based on personal training and competitive demands throughout the day. The entire line was formulated based on peer-reviewed clinical research, collaboration between leading Herbalife scientists, and the input of professional athletes. Each product is certified and tested for substances banned by professional and collegiate athletic governing bodies. Outer Nutrition Our Outer Nutrition products complement our weight management and targeted nutrition products and aim to improve the appearance of the body, skin and hair. These products include skin cleansers, toners, moisturizers, facial masks, shampoos and conditioners, body-wash items and a selection of fragrances for men and women. In the fourth quarter of 2013, we launched the Herbalife SKIN line consisting of ten anti-aging products in the U.S. which will eventually replace the Skin Activator line and other related products. Literature, Promotional and Other Products We also sell literature and promotional materials, including International Business Packs, sales tools, and educational materials designed to support our Members sales and marketing efforts. We also provide internet based tools such as BizWorks, a customizable retail website for our Members to enhance the on-line experience and improve their productivity. 6

9 NETWORK MARKETING PROGRAM General Our products are distributed through a global network marketing organization comprised of approximately 3.7 million Members, most of whom are discount customers, operating in 91 countries as of December 31, In China, due to local regulations, our sales are conducted through Company operated retail stores, sales representatives, sales officers and independent service providers; in the areas where we have a direct selling license, our sales representatives, sales officers and independent service providers can sell Herbalife product outside of the retail establishments. In addition to helping our Members and their customers achieve their goals of health and wellness through consumption of our products, we offer our Members, who are independent contractors, a potential income opportunity. Members may earn income on their own sales and can also earn commissions, such as Royalty Overrides, based on purchases of our products made by their sales organization for consumption or resale. We believe that our products are particularly well-suited to the network marketing distribution channel given the need for consumer education of nutrition products and the high touch and service for those customers on weight loss or weight management programs. We believe our continued commitment to develop high-quality, science-based products will enhance our Members ability to attract new Members and consumers. Our sales are generated primarily from Member purchases that are for reasons other than earning multi-level compensation under the Company s marketing plan. The majority of our Members have not sponsored another Member and do not earn compensation relating to product sales made by or to other Members. We believe these Members have joined the network for reasons other than participating in our multi-level compensation plan such as personal consumption and reselling products to others to earn retail profit. On July 18, 2002, we entered into an agreement with our Members that no material changes adverse to the Members will be made to aspects of our marketing plan without their consent and that we will continue to distribute Herbalife products exclusively through our Members. We believe that this agreement has strengthened our relationship with our existing Members, improved our ability to recruit new Members and generally increased the long-term stability of our business. Structure of the Network Marketing Program To become a Member in most markets, a person must be sponsored by an existing Member and must purchase an International Business Pack, or IBP. The IBP is a Member kit available in local languages which typically includes product samples, a handy tote, booklets describing us, our compensation plan and rules of Member conduct, various training and promotional materials, Member applications and a product catalog. The cost of an IBP varies by market and provides a low cost entry for incoming Members. IBPs have no Volume Point value and therefore do not generate any Member compensation and cannot be used for Member qualifications or recognition purposes under the Company s marketing plan. Volume Points are point values assigned to each of our products for use by the Company to determine a Member s sales achievement level. We assign a Volume Point value to a product when it is first introduced into a market and the value is unaffected by subsequent exchange rate and price changes. The specific number of Volume Points assigned to a product, generally consistent across all markets, is based on a Volume Point to suggested retail price ratio for similar products in the market. People become Herbalife Members for a number of reasons. Some join simply to receive a wholesale price on products they and their families can enjoy. Some join to earn part-time money wanting to give direct sales a try, whereas others are drawn to Herbalife because they can be their own boss and can earn rewards based on their own skills and hard work. In addition to the benefit Members receive from discounted prices on product they and their families can enjoy, Members can earn profit from several sources. First, Members may earn profits by purchasing our products at wholesale prices, discounted depending on the Member s level within our Member network, and selling 7

10 our products to persons who are not Members and to other Members within their sales organization. Second, Members who sponsor other Members and establish and maintain their own sales organizations may earn Royalty Overrides and production bonuses based on activity of their sales organization in addition to the Mark Hughes bonus. The method for Distributor Allowances and Marketing Plan payouts generally utilizes 90% to 95% of suggested retail price, depending on the product and market, to which we apply discounts of up to 50% for Distributor Allowances and payout rates of up to 15% for royalty overrides, up to 7% for production bonuses, and approximately 1% for the Mark Hughes bonus. We believe each Member s success is dependent on two primary factors: (1) the product sales made by a Member and the activity of his or her sales organization, and (2) the time, effort and commitment a Member puts into his or her Herbalife business. Members, with the exception of those in China, earn the right to receive Royalty Overrides upon attaining the level of sales leader and above, and production bonuses upon attaining the level of Global Expansion Team and above. Once a Member becomes a sales leader, he or she has the opportunity to qualify by earning specified amounts of royalty overrides for the Global Expansion Team, the Millionaire Team or the President s Team, and thereby receives production bonuses of up to 7%. We believe that the opportunity for Members to earn royalty overrides and production bonuses contributes significantly to our ability to retain our most active and productive Members. To become a sales leader, or qualify for a higher level, Members must achieve specified volume thresholds of product sales or earn certain amounts of royalty overrides during specified time periods and must re-qualify once each year. To attain sales leader status, a Member generally must be responsible for sales of products representing at least 4,000 volume points in one month or 2,500 volume points in two consecutive months. An additional optional qualification, introduced globally in October 2009, allows for a Member to achieve sales leader level by personally placing orders with Herbalife that accumulate to 5,000 volume points within 12 months. Sales leaders may then attain higher levels (consisting of the World Team, the Global Expansion Team, the Millionaire Team, the President s Team, the Chairman s Club and the Founders Circle), and earn royalty overrides based on purchases for personal use or resale made by persons in their downline sales organizations and, for members of our Global Expansion Team and above, Members can earn production bonuses on purchases for personal use or resale made by persons in their downline organizations. China has its own unique marketing program which differs from that described above. Under the regulations published by the Chinese Government, direct selling companies are limited to the payment of gross compensation to direct sellers of up to a maximum 30% of the revenue they generate through their own sales of products to consumers. Our business model in China includes unique features as compared to our traditional business model in order to ensure compliance with Chinese government regulations. These include Company operated retail stores and certification procedures for sales personnel. These and other features of our business model in China have resulted in, and will continue to result in, substantial ongoing costs. 8

11 The following table sets forth the number of our sales leaders and sales leader retention rates as of each of the following re-qualification periods: At the End of February Sales Leader Retention Number of Sales Leaders Rate North America... 86,469 79,150 72, % 51.1% 48.6% Mexico... 78,453 67,959 54, % 59.2% 57.9% South & Central America... 79,351 65,653 50, % 55.7% 47.3% EMEA... 57,071 55,121 49, % 61.5% 58.6% Asia Pacific (excluding China) , ,158 90, % 40.2% 38.4% Total Sales Leaders , , , % 52.0% 48.9% China... 30,304 26,262 30,543 Worldwide Total Sales Leaders , , ,027 In February of each year, we remove from the rank of sales leader those individuals who did not satisfy the sales leader qualification requirements during the preceding twelve months. Members who meet the sales leader requirements at any time during the year are promoted to sales leader status at that time, including any sales leaders who were removed, but who subsequently re-qualified. For the latest twelve month re-qualification period ending January 31, 2014, approximately 51.8% of our sales leaders, excluding China and temporarily Venezuela, requalified. We chose not to require Venezuelan sales leaders to re-qualify due to product supply limitation that may have prevented some sales leaders from re-qualifying. However, had we demoted those Venezuelan sales leaders that did not meet our re-qualifying criteria, our overall retention rate would have been slightly higher than 51.8%. Typically, Members who purchase our product for personal consumption or for short term weight loss or part-time income goals may stay with us for several months to one year while sales leaders who have committed time and effort to build a sales organization generally stay for longer periods. We rely on certifications from the selling Members as to the amount and source of product sales which are not directly verifiable by us. For sales leaders to re-qualify and retain their Member organization and associated earnings, they need to accumulate 4,000 volume points in one month or 2,500 volume points in each of two consecutive months. In order to promote retailing of our products, any sales leaders who accumulate at least 4,000 volume points in the 12-month period can re-qualify as a sales leader and retain a discount of 50%, but will forfeit their Member organization and associated future earnings. Effective beginning the requalification period ending January 2012, the forfeiture of Member organization will not take effect for sales leaders who achieve 10,000 volume points or more within the 12-month period. Motivation and Training We believe that personal and professional development, along with product knowledge and sales and marketing training are key to our Members success and therefore we and our Member sales leaders have established an annual schedule of meetings and events to support this important objective. We and our Member leadership conduct training sessions annually on local, regional and global levels attended by thousands of Members to provide product education, sales and marketing training, for the professional development of our Members. As with any sales force, reward and recognition programs are a significant component in motivating our sales leaders. We invest in regional and worldwide events and promotions to motivate our sales leaders to achieve and exceed sales, recruiting and retention goals. GEOGRAPHIC PRESENCE As of December 31, 2013, we conducted business in 91 countries throughout the world. The top ten countries worldwide represented approximately 73.4%, 73.4%, and 73.0% of net sales in 2013, 2012, and 2011, 9

13 The following table shows net sales by geographic region. Geographic Region Net Sales Year Ended December 31, Percent of Total Net Sales 2013 Number of Countries December 31, 2013 (In millions) North America... $ $ $ % 5 Mexico % 1 South & Central America % 17 EMEA % 52 Asia Pacific... 1, , % 15 China % 1 Worldwide... $4,825.3 $4,072.3 $3, % 91 For financial data by segment see Note 10, Segment Information, to the Consolidated Financial Statements. Our primary opportunity for future growth is to develop and further penetrate existing markets through various growth strategies. Additionally, we will continue to expand our presence into new markets where the relevance of our products and distribution channel provide an economic opportunity to our Members and us. MANUFACTURING, WAREHOUSING AND DISTRIBUTION Our objective is to provide the highest quality products to our Members and their customers. We seek to accomplish this goal through implementation of our seed to feed strategy that includes significant investments in quality assurance, scientific personnel, product testing, and increasing the amount of self-manufacturing of our top products. Our seed to feed strategy is rooted in using quality ingredients from traceable sources coupled with the vertical manufacturing of our most popular products. Ingredients are sourced from companies that are large and reputable suppliers in their respective field. For example Soy, our number one ingredient, is sourced from Solae (a division of Dupont) and ADM. Our vitamins, minerals and other key ingredients come from companies such as DSM (formerly Roche Vitamins) and BASF. Other key suppliers include Tate & Lyle, Danisco (a division of Dupont), Kyowa Hakko, and Naturex. In addition to our own modern quality processes, sourcing from these suppliers also provides integrity to our ingredients by utilizing similar quality processes, equipment, expertise and traceability provided by these leading ingredients companies. For our botanical products, our seed to feed strategy also includes self-manufacturing our teas and herbal ingredients. In 2012, we completed our botanical extraction facility in Changsha (Hunan) China. Our procurement activities now stretch back to the farms and will include the complete self-processing of teas and botanicals into finished raw materials. The facility is in its ramp up phase, which will span several years to accommodate our rigorous ingredient qualification process, with an ultimate goal of producing our teas and the majority of our important botanical products. The foundation for high quality products is the quality of the ingredients as noted above. The next key component of our seed to feed strategy involves the high quality manufacturing of these ingredients into finished products, including vertical manufacturing. In addition to self-manufacturing, we purchase products from thirdparty manufacturers which account for the majority of our product purchases. During 2013, we purchased approximately 30% of our products from our top three third-party manufacturers. We work closely with our third-party manufacturers to ensure high quality products are produced and tested through a vigorous quality control process. Our current strategy is to continue expanding our self-manufacturing. We accelerated this initiative with the 2009 acquisition of Micelle Labs in Lake Forest, California and renovating the facility into a high-output, high-quality powder and liquid manufacturer. We call this facility the Herbalife Innovation and Manufacturing Facility (or HIM ) Lake Forest. We have taken similar steps to support our China market, with our HIM Suzhou facility which began operation in Together, these facilities produce approximately 30% of our products sold worldwide. As a continuation of this strategy, in December 2012, we purchased an approximate 11

14 800,000 square foot facility in Winston-Salem, North Carolina. This facility is currently under design and renovation with an expected opening in mid Once this facility is online and fully operational, we estimate that 60%-65% of our worldwide product sales will be self-manufactured in our HIM facilities around the world. In our U.S. Company-owned facilities, which primarily produce for the US, Canada and Mexico markets, we operate and test to the U.S. FDA s strict dietary supplement current Good Manufacturing Practices (cgmps), even though many of the products being manufactured are classified as food products. For those products not manufactured at HIM facilities, and are typically exported, we combine four elements to ensure quality products: the same selectivity and assurance in ingredients as noted above; use of reputable, cgmp-compliant manufacturing partners; a significant supplier qualification and annual audit program; and finally significant product quality testing. Regardless of the manufacturing site, we own proprietary formulations for substantially all of our weight management products and dietary and nutritional supplements. In addition to ensuring the highest quality ingredients and building the quality into the finished products, we test our incoming raw materials for compliance to potency, identity and adherence to strict specifications, and our finished products are analyzed for label claim and microbiological purity thereby verifying product safety and shelf life in the market. For our self-manufactured products, we do substantially all of our testing in-house at our modern quality control laboratories in the US and China. We have our main quality control lab in Southern California. We also have full quality control labs in HIM Suzhou and HIM Changsha to test products produced at those facilities. In addition we are in the process of creating a global quality control facility in our HIM Changsha facility that will test products made at non-him facilities, even though they are already tested at audited contract manufacturer labs or 3 rd party labs. Finally as part of HIM Winston-Salem, we are building what will be our largest quality control laboratory. All HIM quality control labs contain modern analytical equipment and are backed by the expertise in testing and methods development of our scientists. We employ over 200 professionals performing science or technical related functions, which includes product development, quality control, and scientific and regulatory affairs around the world. The final part of our seed to feed strategy is delivering the high-quality product to our Members and their customers. As the shift in consumption patterns continues to reflect an increasing daily consumption focus, our strategy is to provide more product access points closer to our Members and their customers. We operate in over 400 distribution points ranging from hub distribution centers, or DCs, in Los Angeles, Memphis, and Venray, Netherlands, to mid-size distribution centers in major countries which include Mexico and South Korea, to small pickup locations spread throughout the world. In addition to these Company-run distribution points, Herbalife partners with over 400 retail locations, primarily in Mexico and India, to provide Member pickup points in areas which are not well serviced from Herbalife-run distribution points. We are also experimenting with automated sales kiosks that will provide additional access points to our products. As many of our products can be temperature sensitive, we monitor our DCs for temperature and humidity and often will use shipping tags which monitor these parameters on certain shipment lanes and which provide information to help make adjustments to shipping mode or packaging components to ensure the quality of the product being delivered to a Herbalife Distribution Center. With the shift noted above to daily consumption, we are increasingly shipping directly to smaller Members and in many cases directly to customers of our Members. This has resulted in an increase in the number of orders and a corresponding decrease in the size of the average order. This has led us to increase the size and capabilities of our main distribution centers and install modern picking systems in our Hub DCs, beginning in We will continue to make the necessary investments to support this ongoing trend in our business. PRODUCT RETURN AND BUYBACK POLICIES In substantially all markets, our products include a customer satisfaction guarantee. Under this guarantee any customer who is not satisfied with a Herbalife product for any reason may return it or any unused portion of it within 30 days to the Member from whom it was purchased for a full refund from the Member or credit toward the exchange of another Herbalife product. If they return the products to us on a timely basis, the Member may obtain replacement product from us for such returned products. In addition, in substantially all jurisdictions, we maintain a 12

15 buyback program pursuant to which we will repurchase products sold to a Member who has decided to leave the business. The buyback program has certain terms and conditions that may vary by market, but generally permits the return of unopened and marketable condition products or sales materials purchased within the prior twelve month period, in exchange for a refund of the net price paid for the product. Together product returns and buybacks were approximately 0.2%, 0.3%, and 0.4% of product sales for the years ended December 31, 2013, 2012, and 2011, respectively. OUR COMPETITIVE STRENGTHS AND BUSINESS STRATEGY As a global nutrition company, we believe that the direct selling channel is the most effective way to sell our products given the need for consumer education of nutrition products and the high touch and service for those customers on a weight loss or weight management program. Our objective is sustainable growth in the sales of our products to our Members and their customers by increasing the retailing productivity, recruitment, and retention of our Member base through the following strategies and competitive strengths: Member Base As of December 31, 2013, we had approximately 3.7 million Members, which include approximately 0.2 million China sales representatives, sales officers, and independent service providers, most of whom are discount customers. Collectively, we currently refer to this group as Members. People become Herbalife Members for a number of reasons. Some join to receive a discounted price on products they and their families consume. Additionally, some people join to earn part-time money, wanting to give direct sales a try, whereas others are drawn to Herbalife because they can be their own boss and can earn rewards based on their own skills and hard work. Currently, approximately 672,000 or 18% of our 3.7 million Members have attained the level of sales leader, a total which is comprised of approximately 626,000 sales leaders in the 90 countries where we use our traditional marketing plan and approximately 46,000 China sales officers and independent service providers operating under our China marketing plan. Collectively, we refer to this group as sales leaders. Due to changes in China s labor laws, effective in the third quarter of 2011, we no longer have sales employees in China as they have been transitioned to sales officers and independent service providers. Members may sponsor other Members in an attempt to build a sales organization, whether they have attained the sales leader level or not. A significant majority of our Members, however, are single level Members who have not sponsored another Member. These single level Members are generally considered discount buyers or small retailers, although a small number of these single-level Members have attained the sales leader level. Driving Daily Consumption A Central Strategy Herbalife works closely with its Members to support daily consumption initiatives. This sustainable business model is built on a three-fold foundation of (1) effective, systematic Member training; (2) frequent Member contact with their customers; and (3) deeper penetration into communities, that is, capturing more customers in a given geographic area. In many instances, Members achieve frequent contact with their customer base utilizing Distributor Methods of Operations, or DMOs, such as Nutrition Clubs, Weight Loss Challenges and Herbalife Fit Camps. Our Product Strategy Our product strategy is focused on providing high-quality, science-based products that can support a healthy active lifestyle for Members and their customers in the areas of weight management; targeted nutrition (including everyday wellness and healthy aging); energy, sports & fitness; and outer nutrition. We rely on the scientific 13

16 contribution from members of the Company s Nutrition Advisory Board, along with our in-house scientific team, to continually upgrade or introduce new products as new scientific studies become available and accepted by regulatory authorities around the world. Additionally, to support our daily consumption initiatives, our product strategy includes projects such as seasonal flavors of our meal replacement shake, new flavors of top selling products and various package sizes. We aim to have at least one major product launch each year, timed around our major regional Member education and training events. These launches generally target specific product categories and markets we deem strategic to our business. Our Training Events and Promotions We use product education and sales and marketing training events and promotions on a local, national and international scale to help strengthen the personal and professional skills of our Members, which can allow them to become more effective in building sales organizations as well as developing customer relationships and maintaining high customer retention rates. These events also serve as the platforms to showcase and disseminate bestpractices from around the world such as Nutrition Clubs, Lifestyle centres and offices, Weight Loss Challenges, The Total Plan, Super and Mega HOM s, Roadshows, Product sampling initiatives, Fit Camps and other business methods, as well as new, or upgraded product introductions. Our Brand To increase our brand awareness we and our Members have entered into numerous marketing alliances around the world. Herbalife sponsorships of and partnerships with featured athletes, teams and events promote brand awareness, the use of Herbalife products, and Better living through nutrition. We continue to build brand awareness and work towards becoming the most trusted brand in nutrition. We also work to leverage the power of our Member base as a marketing and brand-building tool. We maintain a brand style guide and brand asset library so that our Members have access to the Herbalife brand logo and marketing materials for use in their marketing efforts. Improved Product Access As adoption of daily consumption methods expands, we have identified a number of methods and approaches that better support Members by providing access points closer to where they do business. Specific methods vary by markets, considering local Member needs as well as infrastructure and available resources. We continue to expand the number of Sales Centers, smaller pick up locations (including third party collection points), brand experience centers and automated sales centers. This expansion is based on the needs of our Members and the growth of the business primarily from deeper penetration into existing markets. For example, we now have distribution agreements with two large retailers in Mexico and we are piloting a similar arrangement with a third retailer. Our Members can therefore pick up their product orders at the customer service counters at more than 400 retail locations. We believe that by leveraging the retailer s distribution system we are providing our Members with easier product access. We will continue to evaluate the need to increase the number of sales centers in existing and additional markets. Our Infrastructure We continue to invest in our technology infrastructure in order to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in technology, evolving industry and regulatory standards, emerging data security risks, and changing user patterns and preferences. We leverage an Oracle business suite platform to support our business operations, improve productivity and support our strategic initiatives. In addition, we also employ information technology systems to support Members including our Internet-based marketing and Member services platform with tools such as BizWorks, MyHerbalife, Go Herbalife, ichange, and Herbalife Mobile. We continue to invest in business intelligence tools 14

17 to enable better analysis of our business and to identify opportunities for growth. We will continue to build on these platforms so that we can take advantage of the rapid development of technology around the globe. We believe our Seed to Feed strategy allows us to better control the quality, cost, and supply reliability of our raw materials and finished products. Our investment in manufacturing increased in 2009 with the purchase of certain assets of Micelle Laboratories, Inc., a Lake Forest, California contract manufacturer of food and nutritional supplements. We purchased these assets to expand our manufacturing capabilities and completed modifications to this facility in We continued the execution of this strategy with the joint venture in Changsha, Hunan, China to build a botanical extraction facility that will provide improved traceability and processing of our botanical raw materials. This facility as well as significant expansion of our Suzhou manufacturing facility became operational in late 2012 and early 2013 respectively. Additionally, in December 2012 we purchased a manufacturing facility in Winston-Salem, North Carolina, which will allow us to further increase the self -manufacturing of the Company s top selling products for worldwide export and is expected to be operational in mid Scalable Business Model Our business model enables us to grow our business with moderate investment in our infrastructure and fixed costs. We require no Company-employed sales force to market and sell our products. We incur no direct incremental cost to add a new Member in our existing markets, and our Member compensation varies directly with sales. In addition, our Members bear the majority of our consumer marketing expenses, and sales leaders sponsor and coordinate a large share of Member recruiting and training initiatives. Furthermore, we can readily increase production and distribution of our products as a result of having both our own manufacturing facilities and numerous third party manufacturing relationships, as well as our global footprint of in-house distribution centers. Geographic Diversification We have expanded our network marketing organization into 91 countries as of December 31, While sales within our local markets may fluctuate due to economic, market and regulatory conditions, competitive pressures, political and social instability or for Company-specific reasons, we believe that our geographic diversity mitigates our exposure to any one particular market. We opened three new markets during 2013 and our strategic plan includes opening new markets during New markets opened in 2013 accounted for less than 0.1% of net sales in Our Science and our Products We are committed to providing our Members with high-quality, science-based products to help them increase consumption and the retailing of our products, and if relevant, the recruiting and retention of their sales organization. We believe this can be best accomplished in part by introducing new products and by upgrading, reformulating and repackaging existing product lines. Our internal team of scientists and product developers collaborate with both our Nutrition Advisory Board and key ingredient suppliers to formulate, review and evaluate new product ideas. Once a particular market opportunity has been identified, our scientists along with our marketing and sales teams work closely with Member leadership to successfully develop and launch the product. We believe our focus on nutrition and botanical science and our efforts at combining our internal efforts with the scientific expertise of outside resources that include our ingredient suppliers as well as our Nutrition Advisory Board and the resources of the UCLA Lab for Human Nutrition discussed below have resulted in product differentiation that has given our Members and consumers increased confidence in our products. The Company continues to increase its investments in the areas of science and other technical functions including: research and development associated with creating new product formulations, clinical studies of 15

18 existing products or products in development, technical operations to improve current product formulations, quality assurance and quality control to establish the appropriate quality systems, controls and standards as well as rigorous ingredient and product testing to ensure compliance with regulatory requirements, as well as in the areas of regulatory and scientific affairs. Globally we spent approximately $51 million in 2013 on these activities, excluding any royalty fees associated with our products, which included approximately $2 million of research and development spending. In 2010, we launched the Herbalife Nutrition Institute. The Institute is an informational resource dedicated to promoting excellence in the field of nutrition. The Institute s website is our primary communication vehicle, and an educational resource for the general public, government agencies, the scientific community, and our Members, about good nutrition and basic health. Its mission is to encourage and support research and education on the relationship between good health, balanced nutrition and a healthy active lifestyle. In addition to providing research and education on the website and through sponsored conferences and symposia, the Institute will have associations with major nutrition science organizations. Part of the Herbalife Nutrition Institute is the Company s Nutrition Advisory Board. The Nutrition Advisory Board is comprised of leading experts around the world in the fields of nutrition and health who educate our Members on the principles of nutrition, physical activity and healthy lifestyle. The Institute and the Nutrition Advisory Board are chaired by David Heber, M.D., Ph.D., Founding Director of the Center for Human Nutrition at the University of California, Los Angeles (UCLA). We believe that it is important to maintain our relationships with members of our Nutrition Advisory Board and the editorial board of the Herbalife Nutrition Institute by recognizing the time and effort that they expend on our behalf. Each member of our Nutrition Advisory Board, other than Dr. Heber, generally receives approximately $20,000 annually, plus approximately $1,500 for every day that they participate in a Member event and approximately $500 for every day that they need to travel to such events. Members of the editorial board of the Herbalife Nutrition Institute are compensated for their time and efforts by receiving a $5,000 annual stipend, except Dr. Lou Ignarro. We do pay a consulting firm, with which Dr. Ignarro is affiliated, a royalty on sales of Niteworks, certain healthy heart products, and other products that we may mutually designate in the future that are, in each case, sold with the aid of Dr. Ignarro s education and consulting, promotional or endorsement services, with such amounts totaling $3.4 million, $3.2 million, and $2.9 million, in 2013, 2012, and 2011, respectively. Generally, other than the equity awards granted in 2012, 2011, 2010 and 2005, Dr. Heber receives no direct compensation from us although we do reimburse him for travel expenses and we do pay to a firm, with which Dr. Heber is affiliated, a quarterly fixed royalty of $75,000. Both Dr. Heber and Dr. Ignarro are Emeritus Professors and are affiliated with Herbalife as individuals and not as representatives of UCLA. The University of California does not endorse specific products or services as a matter of policy. In addition, the other members of our Nutrition Advisory Board and the editorial board of the Herbalife Nutrition Institute are affiliated with Herbalife as individuals and not as representatives of their respective universities. Herbalife has engaged universities in other countries throughout the world in clinical research including Germany, Mexico, Taiwan, and China. In addition, three research contracts were executed in the past for research at UCLA. We have also donated funds to the UCLA Center for Human Nutrition since 2002 with total donations of approximately $2.0 million. This amount includes donations of lab equipment and software to establish the Mark Hughes Laboratory for Cellular and Molecular Nutrition and the Mark Hughes Human Performance Laboratory. All donations were made for the unrestricted support of research and educational programs in the Center in diverse areas of human nutrition research including weight management, exercise physiology, fruit and vegetable bioactives, and botanical dietary supplements. In addition, we have made donations from time to time to UCLA to fund research and educational programs. While our direct relationship with UCLA involves clinical studies and research regarding botanical ingredients, we intend to take full advantage of the expertise at UCLA by committing to support research that will further our understanding of the benefits of phytochemicals. Additionally in 2010, we initiated a botanical identification program with UCLA which is intended to help with the operational activities in our quality labs in China and the U.S. and in our botanical extraction facility in Changsha, Hunan, China. 16

19 COMPETITION The categories of weight management, nutrition and personal care products are very competitive in many channels including those of direct selling, the internet, in specialty retailers and the discounted channels of food, drug and mass merchandise. Herbalife has differentiated itself from the peer group through our Member focus on the consultative and education nature of the sales process and the frequent contact that many Members have with their customers. From a competitive stand point, there are many providers and sales outlets of weight management products including quick-service restaurants and specialty retailers, but we believe that none have effectively coupled the product, personal coaching and the product access provided by our daily consumption business methods such as nutrition clubs, weight loss challenges or fit camps. We are subject to competition for the recruitment of Members from other network marketing organizations, including those that market weight management products, nutritional supplements and personal care products, as well as other types of products. Our ability to remain competitive depends on having relevant products that meet consumer needs, a rewarding compensation plan, and a financially viable company. REGULATION General In both our United States and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations and guidance, court decisions and similar constraints. Such laws, regulations and other constraints exist at the federal, state or local levels in the United States and at all levels of government in foreign jurisdictions, including regulations pertaining to: (1) the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products; (2) product claims and advertising, including direct claims and advertising by us, as well as claims and advertising by Members, for which we may be held responsible; (3) our network marketing program; (4) transfer pricing and similar regulations that affect the level of U.S. and foreign taxable income and customs duties; (5) taxation of our Members (which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records); and (6) currency exchange and repatriation. Products In the United States, the formulation, manufacturing, packaging, holding, labeling, promotion, advertising, distribution and sale of our products are subject to regulation by various governmental agencies, including (1) the Food and Drug Administration, or FDA, (2) the Federal Trade Commission, or FTC, (3) the Consumer Product Safety Commission, or CPSC, (4) the United States Department of Agriculture, or USDA, (5) the Environmental Protection Agency, or EPA, (6) the United States Postal Service, (7) United States Customs and Border Patrol, and (8) the Drug Enforcement Administration. Our activities also are regulated by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed or sold. The FDA, in particular, regulates the formulation, manufacture and labeling of over-the-counter, or OTC, drugs, conventional foods, dietary supplements, and cosmetics such as those distributed by us. The majority of the products marketed by us in the United States are classified as conventional foods or dietary supplements under the FFDCA. Internationally, the majority of products marketed by us are classified as foods, health supplements or food supplements. FDA regulations require us and our contract manufacturers to meet relevant current good manufacturing practice, or cgmp, regulations for the preparation, packaging, holding, and distribution of foods, dietary supplements and OTC drugs. Herbalife has regularly implemented enhancements, modifications and improvements to our manufacturing and corporate quality processes and believes we and our contract manufacturers are compliant with the FDA s cgmp regulations with respect to dietary supplements, foods (including acidified foods), and OTC drugs sold by Herbalife in the United States. Herbalife recently enhanced its manufacturing facility and processes for its aloe beverages to conform to FDA s acidified food processing regulations. This effort, as well as ongoing cgmp enhancements throughout its facilities, have resulted in additional costs. See 17

20 item 1A Risk Factors for further discussion regarding the promulgated cgmp regulations. If we were to be found not in compliance with cgmp regulations, it could have a material adverse effect on our results of operations and financial statements. Most OTC drugs are subject to FDA Monographs that establish labeling and composition requirements for these products. Those of our products which are classified as OTC drugs must comply with these Monographs, and our manufacturers must list all products with the FDA and follow cgmp rules applicable to those products. Our cosmetic products are regulated for safety by the FDA, which requires that ingredients meet industry standards for non-allergenicity and non-toxicity. Performance claims for cosmetics may not be therapeutic. The U.S. Dietary Supplement Health and Education Act of 1994, or DSHEA, revised the provisions of the Federal Food, Drug and Cosmetic Act, or FFDCA, concerning the composition and labeling of dietary supplements and, we believe, the revisions are generally favorable to the dietary supplement industry. The legislation created a new statutory class of dietary supplements. This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, and the legislation grandfathers, with some limitations, dietary ingredients that were on the market before October 15, A dietary supplement that contains a dietary ingredient that was not on the market before October 15, 1994, or has been approved by FDA for use in dietary supplements, will require a new dietary ingredient notification to FDA with evidence of a history of use or other evidence of safety establishing that it is reasonably expected to be safe, unless it qualifies for an exception to this notification requirement. During July 2011, the FDA issued a New Dietary Ingredient Notification Draft Guidance, or the draft Guidance. During December 2012, following consultation with stakeholders, the FDA indicated it intends to revise the draft Guidance. Depending on the form of any final Guidance issued by the FDA on the use of New Dietary Ingredients, the Company may be required to develop evidence that ingredients used in our products actually qualify for so-called grandfather status, develop evidence that they are otherwise exempt from the notification requirement, and/or submit one or more new dietary ingredient notifications. The Company may also elect to develop new formulations in order to avoid use of any nongrandfathered ingredients. Under DSHEA, dietary supplement labeling may bear structure or function claims, which are claims that the products affect the structure or function of the body, without prior FDA approval, but with notification to the FDA. They may not bear a claim that they can prevent, treat, cure, mitigate or diagnose disease (a disease claim). FDA s regulations describe how the FDA distinguishes disease claims from structure/function claims. During 2004, the FDA issued guidance, paralleling an earlier guidance from the FTC, defining a manufacturer s obligations to substantiate structure/function claims. In addition, the agency permits companies to use FDA-approved full and qualified health claims for products containing specific ingredients that meet stated requirements. As a marketer of dietary and nutritional supplements and other products that are ingested by consumers, we are subject to the risk that one or more of the ingredients in our products may become the subject of regulatory action. There are significant negative national media reports regarding dietary supplement oversight and safety, some of which are calling for the repeal or amendment of DSHEA. We have been advised that DSHEA opponents in Congress may use this anti-dshea momentum to advance new legislation during the 113th Congress to amend or repeal DSHEA or to regulate specific product types or the use of specific ingredients. If this should occur we believe that the DSHEA opponents may propose one or more of the following: (1) premarket approval for safety and effectiveness of dietary ingredients; (2) specific premarket review of dietary ingredient stimulants; (3) reversal of the burden of proof standard which now rests on the FDA; and (4) a redefining of dietary ingredient to remove either botanicals or selected classes of ingredients now treated as dietary ingredients. On December 22, 2007, a law went into effect in the United States mandating the reporting of all serious adverse events occurring within the United States which involve dietary supplements or OTC drugs. We believe that we are in full compliance with this law having implemented a worldwide procedure governing adverse event identification, investigation and reporting which is managed by our Global Product Science, Safety and Compliance department in collaboration with Worldwide Regulatory, Government & Industry Affairs department, and our Distributor Relations Call Centers. As a result of our receipt of adverse event reports, we may from time to time elect, or be required, to remove a product from a market, either temporarily or permanently. 18

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